2023-05-26 06:53:46 ET
Summary
- US commercial crude inventories have recently experienced a large weekly draw, which could indicate higher oil prices in the near future.
- The US government has been using its Strategic Petroleum Reserve to keep commercial inventories from draining and to mitigate fuel-based inflation.
- OPEC+ production cuts could lead to a scenario where global oil demand outpaces supply, supporting a bullish outlook on crude oil prices.
Although oil prices are no longer anywhere near as high as they were at one point last year, they are still quite high. After bottoming out at a level that's less than $68 per barrel in March of this year, prices have moved higher again, with WTI crude currently at $74.10 per barrel. One of the most recent drivers of upside was a rather large weekly draw of commercial crude here in the US. But of course, this is only a single data point. To truly understand what is going on with the oil market, we need to dig deeper than that. And when we do, we see that we could be setting ourselves up for even higher prices in the not-too-distant future.
Recent data is bullish
According to the weekly report issued by the EIA (Energy Information Administration), commercial crude inventories in the week ending May 19th totaled 455.2 million barrels. That's 12.5 million barrels lower than the 467.6 million reported one week earlier. To see a draw this large, we would have to go back to the week ending November 25th of 2022 when commercial crude inventories fell by nearly 12.6 million barrels. To put this all in context, analysts had forecasted an inventory build of roughly 800,000 barrels.
This becomes even more bullish when you consider that this ignores what we have in SPR (Strategic Petroleum Reserve) capacity. In the most recent week, the SPR held 358 million barrels of crude. That was down about 1.6 million barrels compared to the 359.6 million barrels reported one week earlier. When we look at all commercial oil and oil products, we would have seen a decline of 10.8 million barrels week over week. And when you factor in SPR crude, this number balloons to 12.4 million.
On its own, this is great to see if you are bullish on oil. But when you start looking at the bigger picture, you see something rather exciting. In the chart below, for instance, you can see two different sets of data that I gathered. The blue line looks at the weekly level of crude oil in commercial inventories, while the green line looks at ending stocks of crude oil in the SPR specifically. Year over year, commercial crude inventories have actually increased by 35.4 million barrels. This would normally be a bearish data point, since it's ultimately the amount of crude in commercial inventories that determine pricing.
What this data actually tells, however, is that, in order to keep oil prices from climbing, the federal government has stepped in with the SPR and has used its lofty inventory levels to keep commercial inventories from draining. That makes sense and it is something that has been well publicized as the Biden Administration seeks to mitigate fuel inflation that would otherwise make inflationary pressures we have been dealing with more painful than they have been. As a short-term solution, this has been logical. But at some point, SPR crude draws need to reverse or at least level off.
When we move away from crude and focus on all oil and petroleum products, the picture actually looks worse. In the chart below, the green line represents weekly ending stocks of crude oil and petroleum products that do not include the SPR. And the blue line looks at them with the SPR data included. Clearly, the blue line has declined at a faster rate than the green line has. But that's because of the aforementioned SPR inclusion. Ultimately, what this means is that, absent a change in the supply and/or demand picture for oil, we are more likely to see prices increase rather than decrease for the foreseeable future.
Those who are skeptical of my stance on this are fair to point out that oil markets are global, not regional. This data so far has only looked at inventory levels associated with the US. I would counter that with the argument that, over the past several years now, the vast majority of fluctuations in the market have been visible in the US market because, unlike the rest of the world, US production is largely controlled by private companies as opposed to governments. And because of laws that prohibit coordination between firms, only market forces as opposed to regulation can materially adjust production levels.
More important than this, however, is that the global supply and demand picture doesn't look as bearish as some would have you believe. Consider again data from the EIA. In its Short-Term Energy Outlook that was released earlier this month, the organization estimated that global supply this year would be around 101.34 million barrels per day. If this comes to fruition, it would be about 350,000 barrels per day higher than the 100.99 million barrels per day of demand. In 2024, they are forecasting excess daily production of around 310,000 barrels per day, with supply of 103.02 million barrels per day and demand of 102.71 million.
This is far from a bullish picture. But I would argue that it is way off the mark. Just earlier this year, for instance, OPEC+ stated that it would be cutting production by 1.16 million barrels per day as of this month. This is on top of a 500,000 barrel per day cut initiated by Russia previously. Ignoring the Russia cut, the cut from the rest of OPEC+ could have a rather substantial impact on the global supply and demand balance. You see, in its Short-Term Energy Outlook, the EIA estimated that OPEC crude production would be 28.34 million barrels per day this year and 28.99 million barrels per day next year. According to OPEC itself, production levels were 28.60 million barrels per day in April, down from the 28.79 million barrels per day that the group ultimately produced in March.
While some of the OPEC+ cut will come from countries outside of OPEC, the lion's share will come from the group's core members. Saudi Arabia, for instance, said that it would cut production by 500,000 barrels per day from May of this year through the end of 2023. Iraq chipped in with a cut of 211,000 barrels per day. The UAE and Kuwait agreed to cuts of 144,000 barrels per day and 128,000 barrels per day, respectively. The list goes on. But assuming that these cuts are not made-up for elsewhere, which I don't believe they will be, we could be setting ourselves up for a scenario where demand outpaces supply.
Takeaway
At this moment, I believe that oil markets are not fully processing exactly what is going on. While the data is out there for everyone to see, I believe that prices would be quite a bit higher than they are today if the market digests to the news accurately. Inventory levels here in the US are quite low and the SPR has drained A substantial amount of its inventories in order to combat high prices. And with the latest cut from OPEC+, I believe that the world is experiencing a state of demand that outpaces supply levels. And very likely, that state began this month. For these reasons, I cannot help but to be very bullish on crude at this moment. I would even go so far as to say that I agree with Saudi Arabia's oil minister who said that short sellers, betting that oil prices will fall, should 'watch out' for pain.
For further details see:
Strong Signs That Oil Moves Higher From Here